ALNY

Business Context and Reporting Period

Company: Alnylam Pharmaceuticals, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: Alnylam is a biopharmaceutical company developing therapeutics based on RNA interference (RNAi). The company has no approved products and generates revenue primarily through strategic alliances, government contracts, and licensing. As of March 31, 2010, the company had an accumulated deficit of $312.2 million.

Key Financial Metrics

Note: Total Cash, Equivalents & Marketable Securities calculated as Cash ($114,947) + Current Marketable Securities ($146,811) + Non-Current Marketable Securities ($157,509).

Material Changes vs. Prior Period

• Revenue: Net revenues decreased slightly by 2% ($493,000) compared to Q1 2009. This was driven by a decrease in Novartis revenues due to reduced resource allocation and a wind-down of a government contract with the Defense Threat Reduction Agency (DTRA). These decreases were partially offset by an increase in Roche alliance revenue due to a development milestone achieved in late 2009.
• Operating Expenses: Total operating expenses increased by 9% ($2.8 million).
  • Research and Development (R&D): Decreased by 2% ($621,000), primarily due to lower license fees paid to third parties (e.g., Isis) in the current period compared to the prior period. Increases in compensation and stock-based compensation partially offset this decline.
  • General and Administrative (G&A): Increased significantly by 45% ($3.5 million), driven largely by higher consulting and professional services expenses related to legal activities (patent litigation).
• Liquidity: Cash and cash equivalents decreased by $22.5 million during the quarter. Net cash used in operating activities was $15.6 million, compared to cash provided by operating activities of $1.2 million in the prior year. This shift was due to the net loss and significant decreases in accounts payable and income taxes payable.

Guidance, Outlook, and Risks

• Outlook: Management expects to incur additional losses over the next several years as R&D activities continue. The company believes its existing cash, cash equivalents, and marketable securities ($419.3 million), combined with expected cash from alliances, will fund operations for at least the next several years.
• Clinical Pipeline:
  • ALN-RSV01: Phase IIb clinical trial initiated in February 2010 for adult lung transplant patients with RSV infection.
  • ALN-VSP: Phase I trial ongoing for liver cancer.
  • ALN-TTR01: Regulatory applications filed; Phase I trial planned for the first half of 2010 for ATTR.
  • ALN-PCS: Identified as the next clinical candidate for hypercholesterolemia.
• Strategic Alliances:
  • Novartis: Collaboration expected to end in Q4 2010 unless Novartis exercises an integration option, which would trigger a $100 million payment.
  • Roche & Takeda: Major platform alliances providing steady revenue recognition.
  • Regulus Therapeutics: Joint venture with Isis (49% owned by Alnylam) focused on microRNA therapeutics. Regulus recently secured an $8 million upfront payment from GSK.
• Risks and Contingencies:
  • Patent Litigation: Ongoing legal action against Whitehead Institute, MIT, and UMass regarding "Tuschl I" and "Tuschl II" patent applications. Trial expected to start mid-2010. No liability has been recorded due to uncertainty.
  • Regulatory Approval: No products have received regulatory approval; success depends on clinical trial results and FDA/foreign regulatory acceptance of RNAi technology.
  • Financing: Future capital requirements may necessitate additional equity or debt financing, which could result in dilution or restrictive covenants.

Key Facts for Investor Verification

• Cash Runway: Verify the sufficiency of the $419.3 million cash position against the projected burn rate, given the company's history of losses and lack of product sales.
• Novartis Option: Monitor the status of the Novartis collaboration, specifically the likelihood of the $100 million integration option exercise before the Q4 2010 expiration.
• Patent Litigation Outcome: Assess the potential impact of the pending trial against Whitehead/MIT/UMass on the company's core intellectual property portfolio.
• Clinical Trial Results: Track the results of the Phase IIb trial for ALN-RSV01 and the initiation of Phase I trials for ALN-TTR01 and ALN-PCS.
• Revenue Recognition: Review the straight-line recognition policies for major alliances (Roche, Takeda, Cubist) and the impact of milestone achievements on future revenue volatility.